It is risky to de-risk trade with China

Trade clashes between western corporate interests, environmental targets and security-oriented approach The competition for the word of the year has already ended. The winner in the geopolitical section is “de-risking”.

The D-word is now a household name in less than two weeks. Ursula von der Leyen was the European Commission President who delivered a address on China in late March. The Biden administration then took up the de-risking strategy. Last week, a G7 summit endorsed .

De-risking is a way for western leaders to get off the hook in terms of rhetoric. has often criticized for previous talk of “decoupling”. De-risking is more targeted and prudent. Western businesses have been told they can still do business with China, but that certain safeguards will be needed.

Risks that are of concern to the US and EU can be divided into two categories: those that China receives from the West and those that the West receives from China.

The category “stuff we give them” is dominated by advanced technology that could be used for military purposes. This category includes the restrictions placed by the US on semiconductor exports — and, last Thursday, by Japan.

The G7 nations restrict China’s access critical technologies while also trying to break free from their dangerous dependence on China. Rare earths and other critical minerals are at the top of the list. They are vital for battery technology, and also the green transition. In her speech, von der Leyen stated that the EU imports 97% of its lithium – crucial for the production of batteries – from China.

The west also wants to reduce the dependency on Taiwan for advanced semiconductors, which accounts for more than 90% of the total. Taiwan is a vulnerable island and is at risk from an invasion by China. The US Chips Act 2022 provides $52bn in funding to boost chip manufacturing in the US.

De-risking theory is now fairly clear. However, the practice is murkier.

Already, three major problems are emerging. The first is the conflict between the interests and companies of countries. The second is the cost and difficulty of reducing dependence on China. The third is a persistent ambiguity regarding the nature of risk. Are we worried about China’s political coercion, or a possible war?

Normal times, western governments’ main goal is to support domestic companies who want to export. In the world of derisking, this is not always the case.

Jensen Huang , CEO of Nvidia (the California-based semiconductor company), warned last week that American companies would suffer “enormous harm” if they were prevented from selling advanced chip technology to China. US officials have not changed their minds. They claim that Nvidia chips play a crucial role in the development of AI.

The report also claims that China can easily use AI to manipulate politics through “deep-fake” news. As the EU and US tighten their restrictions on investment in China, more western companies will be subject to Nvidia style controls.

The game of limiting exports and critical technology is a game in which two players can be involved. The west also urgently tries to reduce its dependence on China in key areas.

Opinions vary on how easy it will be. ‘s Dutch trade minister Liesje Schreinemacher warned that Europe’s transition to a greener economy will be impossible without China. China is the world’s largest producer of solar cells, batteries, and the minerals used in them. One Western intelligence official claims: “It took 30 years for us to become dependent on China in terms of critical minerals and rare Earths. It will take that same time to unwind this dependency.”

Jason Matheny of the Rand Corporation is a bit more optimistic. He worked in Joe Biden’s White House on national security and technology. He points out “rare earths actually aren’t that rare”. China’s real power lies in the processing of minerals that are critical, which can be a dirty business. Some countries, like Australia, with low populations, are willing to do this.

Western de-risking is based on three pillars. They are: reduce dependence on China, limit technology exports and continue to encourage western firms to trade on the huge Chinese market. As long as political coercion is the risk being hedged, it is a coherent policy. It begins to unravel if there is a real risk of a war between China and the US, possibly over Taiwan. Some US officials have now placed the likelihood of a war at 50% or higher.

If this happens, western companies would be under immediate pressure from the Chinese government to leave China. Apple, whose products mainly come from southern China, and Volkswagen which make at least half of their profits in China could be in danger. As one Western security official put it, “If there’s a war with China the impact on the global car market will not be our biggest problem.”